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Procurement: contract variations

Procurement: contract variations

Published: 24th July 2019
Area: Corporate & Commercial
Author: Uddalak Datta

One of the real difficulties in advising on procurement is the multiplicity of sources of law. While there appears to be a single procurement code – the Public Contracts Regulations 2015 (Regulations) – the law is also set out in a number of supplementary case decisions from the domestic and EU courts.

This overlap between the codified rules in the Regulations and case law is clear when trying to advise on procurement law as it applies to contract variations.

The historic procurement Directive and Regulations were silent on the impact of changes to a contract once it was awarded. This was for the straightforward reason that the procurement rules govern the process of contracting, up until the contract award decision, which is a clear conclusion. This simple process was thrown into flux by the European Court decision in case C-454/06 pressetext Nachrichtenagentur GmbH v Republik Österreich, which provided that a material change to the awarded contract can be treated as a new contract and must be awarded under a further, separate procurement process.

The 2014 package of procurement Directives, and the implementing Regulations, now explicitly implement the pressetext case law, while providing for certain additional permitted contract variations. I have heard criticism from other practitioners that incorporating case law within the Directives was a wrong turn, on the basis that it is unnecessary i.e. the case law already exists, so it does not provide any added value; and on the basis that it is unhelpfully misleading, as it leads users to treat the legislation as complete. I am not convinced by this, and think that incorporating the case law helps users navigate the law which needs to be used by non-lawyer procurement professionals.

The rules on permitted variations comprise a combination of case law and politically negotiated legislative provisions. These are implemented and listed in regulation 72 of the Regulations:

(a) The “review clause” modification

This permitted modification anticipates that the specific change has already been anticipated in the original procurement, so that the variation has been “pre-procured”.

(b) The “necessary additional works” variation

There is a generous provision for additional supplies, works or services provided that:

they have become necessary and were not included in the initial procurement;
a change of contractor cannot be made for economic or technical reasons, or would cause significant inconvenience or substantial duplication of costs for the contracting authority;
any increase in price does not exceed 50% of the value of the original contract.

(c) The “unforeseen changes” modification

There is a further, overlapping provision for a modification to the contract – not just for additional supplies – provided that:

the need for modification has been brought about by circumstances which a diligent contracting authority could not have foreseen;
the modification does not alter the overall nature of the contract;
any increase in price does not exceed 50% of the value of the original contract.

(d) For any other modifications, which irrespective of their value, are not substantial

This is the avenue of changes which are set out in the pressetext judgement. The definition of a “substantial” modification is further illustrated as one that:

renders the contract “materially different” in character from the one initially concluded;
introduces conditions which would have either allowed for other candidates or acceptance of an alternative tender;
changes the economic balance of the contract in favour of the contractor.

(e) The “de minimis” exception

There is a “de minimis” threshold for variations. This applies to contract changes which are of a value which is:

below the relevant value threshold set out in the Regulations; and
no more than 10% of the initial contract value for service and supply contracts and 15% of the initial contract value for works contracts.

In addition, there is a permitted exception to cover changes to the contractor following a merger or acquisition.

What about contract extensions?

The rules set out quite clearly the position for one of the most common forms of contract variation: the provision of additional works. Additional works expand the scope of the contract from that initially procured.

By contrast, the rules do not provide any guidance on the other most typical form of contract variation: the contract extension i.e. an extension to the duration of a contract. This is most typical for the provision of ongoing services. There are often any number of reasons for contracting authorities to want to extend a contract. This can range from reasons as wide as an evaluation of the costs of procurement and risks to service change – if it ain’t broke why fix it – to the purely negligent – forgetting to re-tender in time. In the light of that it is always instructive to see the facts of reported cases in order to get a sense of how the courts and the Commission will treat terms as nebulous as “material” or “substantial” in the context of a contract modification.

This question has arisen in the English High Court in the context of an application to lift an automatic suspension arising from a procurement challenge. In that case, the court indicated that an extension beyond the original term could constitute an extension in pressetext terms, even if that was an extension for a limited duration of three months in order to proceed to a full trial of a procurement challenge with the potential remedy of re-tendering the contract.

The Advocate-General of the Court of Justice has published a similar decision in a hearing before the EU courts, in the case of a motorway concession contract. The Italian authorities awarded the contract in 1968 for an initial period of up to 30 years, prior to any applicable procurement law, and extended the contract in 1999 and 2009 when procurement law did apply. In the context of a contract whose duration was changed from 29 years to 47 years – a period of 18 years – the Advocate-General had no difficulty in holding that a change to the expiry date of a contract could constitute a material change.

For more information please follow these links:

Indigo Services (UK) Ltd v Colchester Institute Corporation [2010] EWHC 3237
Case C‑526/17 European Commission v Italian Republic

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